Question

Penn corporation has a single product whose selling price is 10. At an expected sales level of 1,000,000, the company's variable expenses are 6000,000 and its fixed expenses are 300,000. The marketing manager has recommended that the selling price be increased by 20% with an expected decrease of only 10% in unit sales. what would be the company's net operating income if the marketing manager's recommendation is adopted.

1) 12
2) 14
3) 16
4) 18

Answer 1

After adopting the marketing manager's recommendation of increasing the selling price and anticipating a decrease in unit sales, the new net operating income would be $5,100,000.

Step-by-step explanation:

The original net operating income (NOI) at a selling price of $10 with expected sales of 1,000,000 units is:

• Total Sales Revenue = $10 * 1,000,000 = $10,000,000
• Variable Expenses = $6,000,000
• Fixed Expenses = $300,000
• Original NOI = Total Sales Revenue - Variable Expenses - Fixed Expenses = $10,000,000 - $6,000,000 - $300,000 = $3,700,000

If the selling price is increased by 20%, the new selling price would be:

• New Selling Price = $10 * 120% = $12

With a 10% decrease in unit sales, the expected sales volume would be:

• New Unit Sales = 1,000,000 * 90% = 900,000 units

The new NOI with the marketing manager's recommendation would be:

• New Total Sales Revenue = 900,000 units * $12 = $10,800,000
• New Variable Expenses (assuming it stays proportional to sales volume) = $6,000,000 * 90% = $5,400,000
• Fixed Expenses remain at $300,000
• New NOI = New Total Sales Revenue - New Variable Expenses - Fixed Expenses = $10,800,000 - $5,400,000 - $300,000 = $5,100,000

The company's net operating income after adopting the recommendation would be $5,100,000.